Monday, August 28, 2006

Wal-Mart Leads the Race to the Bottem

I don't think the word monopsony is tossed around enough for people to really understand the implications. A monopsony as defined by the Economist is below:

A market dominated by a single buyer. A monopsonist has the MARKET POWER to set the PRICE of whatever it is buying (from raw materials to LABOUR). Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to affect the market price of anything.
Many Wal-Mart supporters claim that the supremacy of Wal-Mart is what the so-called 'free market' is all about. It's all about competition. But how can the small business person compete when they have no power to dictate price to suppliers? Explain how this is fair competition? Monopsonies eventually lead to lower wages and benefits, outsourcing of jobs and outright failure of suppliers.

Barry C. Lynn, author of "The Case for Breaking Up Wal-Mart", gives two examples to explain the effects of a monopsony:

The effects of monopsony also can be difficult to pin down. But again we have easy illustrations ready to hand, in the surprising recent tribulations of two iconic American firms -- Coca-Cola and Kraft. Coca-Cola is the quintessential seller of a product based on a "secret formula." Recently, though, Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart's decree. Kraft, meanwhile, is a producer that only four years ago was celebrated by Forbes for "leading the charge" in a "brutal industry." Yet since 2004, Kraft has announced plans to shut thirty-nine plants, to let go 13,500 workers, and to eliminate a quarter of its products. Most reports blame soaring prices of energy and raw materials, but in a truly free market Kraft could have pushed at least some of these higher costs on to the consumer. This, however, is no longer possible. Even as costs rise, Wal-Mart and other discounters continue to demand that Kraft lower its prices further. Kraft has found itself with no other choice than to swallow the costs, and hence to tear itself to pieces. (My emphasis)

Monopsonies used to be illegal. The Great Atlantic and Pacific Tea Company (A&P) was a monopsony. It used it's in-house brands to force suppliers to do the companies bidding. Back then (1930's) the Federal government took a dim view of this practice. In fact, they created the Robinson-Patman law (known as the Anti-A&P Act) which ...forbade any person or firm engaged in interstate commerce to discriminate in price to different purchasers of the same commodity when the effect would be to lessen competition... President Reagan changed all that by gutting the enforcement of anti-trust laws.

No comments: